SA consumers in unsecured debt trap, no real income increase since 2016

South African consumers are stuck in an unsecured debt trap, while they had no real income increase since 2016, with 25% less take-home pay and spending 62% of their income on repaying their debts. Unsecured debt levels were on average 22% higher in the fourth quarter of 2021 compared to 2016.

It is therefore no surprise that demand for debt counselling in the fourth quarter of 2021 rose by 18% compared to the same period in 2020. This trend also intensified in January with an increase in inquiries of more than 32% compared to January last year, says Benay Sager, head of DebtBusters.

According to the DebtBusters’ Q4 2021 Debt Index, the average loan size has increased by 45%, while the number of debt obligations decreased by 19%, indicating that consumers have more debt per credit agreement and are reaching the point where they are no longer able to qualify for credit sooner.

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Less income, more unsecured debt

Compared to 2016, consumers who applied for debt counselling in the fourth quarter of 2021 had less take-home pay, although nominal income is only slightly lower than in 2016. However, considering cumulative inflation of 24% over the six-year period, real income has shrunk by 25%.

Consumers taking home more than R20,000 or more per month had to use two thirds of their income to repay debt with the debt-to-income ratio at 146%. What was also alarming is that the debt-to-income ratio for the top two income bands was higher in the fourth quarter compared to the same periods in the past.

Unsecured debt levels were on average 22% higher than in 2016. For consumers taking home R20,000 or more per month, unsecured debt levels were 43% higher, indicating that these consumers are using unsecured credit to supplement the erosion in their real income.

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Consumers face perfect storm now with unsecured debt

Sager believes that consumers now face a perfect storm of rising interest rates and growing inflation.

“Average interest rates for bonds and vehicle finance started to decrease from the second quarter in 2020, thanks to the Reserve Bank’s multiple repo rate reductions.

“Consumers with assets benefitted from this, as well as the bank payment holidays introduced to mitigate the impact of the Covid-19 pandemic. Bank payment holidays ended a while ago and now as the repo rate starts to tick up, the benefits of low interest rates will disappear and consumers should do everything possible to reduce the cost of credit and protect their assets.”

Rising interest rates will intensify the pressure on South African consumers to make ends meet.

“Interest rates will take central stage for the foreseeable future and increases will impact our ability to borrow and pay back debt.”

ALSO READ: SA consumers have 24% less income and 25% more debt than in 2016

How to stay out of financial trouble and away from unsecured debt

Meanwhile, Jaco Prinsloo, certified financial planner at Alexander Forbes, has some advice for consumers to spend their money wisely. He advocates mindful spending, tracking your budget and controlling impulse spending to make sure you do not end up in financial trouble.

He says if you have subscriptions for services you never use, such as a gym, vacation club or streaming service, or unread books and unworn clothing or shoes, you need to consider mindful spending.

“Mindful spending is a different way to focus on your income and above all your spending. Focusing on what matters to you, which means doing what makes you happy, regardless of whether you are a fashionista, a techie, a runner, or an avid traveller. Use wasted money and redirect it to what makes you truly happy.”

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A budget will help consumers

Prinsloo says it can be a good idea to create a budget that helps you keep an eye on expenses and identify saving opportunities. Your budget tracks and divides your income, expenses, savings and debt payments into categories so that you can manage your money better. If you have better control of your money, you can plan for the future and have peace of mind.

Controlling impulse spending has become more important because shopping online has become so easy. Before you know it, you have spent the grocery money on items you do not want just because they are on sale.

If you want to spend less and save more, Prinsloo says you should:

• Try a ‘no-spend day’ once or twice a week when you do not spend any money
• Buy everything using cash
• Know your budget
• Unsubscribe from emailer sale and special offer alerts
• Institute a cool-off period for items over R1,000 by giving yourself 24 or 48 hours to think if you really need to buy them.